Foreclosed homes typically happen when the borrower stops making payments on their mortgage, and the bank or secured creditor repossesses the house so that it can be sold off to repay the balance of the defaulted loan. While stories of homes being routinely foreclosed were common during the 2010 United States foreclosure crisis, as the economy has recovered, fewer and fewer foreclosures are being made, with RealtyTrac estimating the rate of foreclosures has fallen more than 62% since 2010. Thus, snapping up a foreclosed home may seem like a great opportunity now that the phenomenon isn’t as much of an epidemic, but before you consider this, there are a few things that you should keep in mind.
Foreclosed neighborhoods are risky
This was particularly a problem during the recession, where communities of foreclosed properties were a common occurrence. Wisebread cautions that buying a property in a neighborhood where several homes are in foreclosure is problematic, with the value of the properties declining significantly as other homes in the area are going for much less. If you buy a foreclosed home in a risky neighborhood, there’s the danger that the home value could plummet.
Avoid auctions unless you’re prepared
Houselogic warns against buying a foreclosed home at auction, as you won’t have the opportunity to tour the house before bidding. Many people leave their homes because they can’t afford the upkeep, leaving the house in a terrible state before it’s finally put up for auction. If you’re sure you want to buy a house at auction, they suggest bidding no more than 70% of the estimated value, as costly repairs are likely.
For Sale by Owner warns that homes in foreclosure, while they may seem like a bargain, can often have complicated issues attached to them, where various creditors are arguing over who is owed what or unpaid taxes. All of this makes closing the title to the home very complicated and potentially costly. If the title isn’t clean, meaning there are no liens or levies against it, the deal could potentially not go through. Foreclosed titles are often quite tricky to navigate.
Stick to bank owned foreclosures
Wisebread suggests bank owned foreclosures due to the fact that title issues have been cleared up, and most importantly, you have the right to tour the property and do a home inspection, so you can see if this bargain is as good a deal as it seems.
You’ll need a pre-approval letter
Before making an offer, you’ll need a pre-approval letter from your mortgage issuer laying out the maximum amount of a mortgage you qualify for. This proves to the seller that you’re serious and have the means to buy the foreclosed property. In a foreclosure sale, this type of pre-approval letter is typically non-negotiable, so you’ll have to have all your financial ducks in a row.